Liberty Media: Confusing But Profitable

by Lawrence Meyers | January 17, 2012 6:00 am

Liberty Media: Confusing But Profitable

John Malone’s media conglomerate, Liberty Media, is a behemoth that has changed form so many times that it’s been difficult for Wall Street to keep up. In fact, even the most battle-hardened analysts have trouble valuing what the company is worth. Malone engages in numerous complex transactions involving tax-free exchanges, and the company’s assets used to be spread across three tracking stocks (though they aren’t anymore). So figuring it all out can give result in a serious headache. Let’s see what we can make of it.

The primary stock is Liberty Media (NASDAQ:LMCA[1]), which has a healthy chunk of assets[2]. There are many assets and interests in here to like, if not love. The company’s best hire was Chris Albrecht, formerly the head of HBO (Time Warner, NYSE:TWX[3]), who has moved aggressively into original programming for the Starz series of pay-TV channels. The programming is good, which has boosted Starz subscription numbers. Starz has plenty of capital, too, having raised $1.5 billion in debt. Liberty’s Live Nation stake is now 21%, and that asset continues to execute. Liberty also holds a 16.6% convertible preferred position in Barnes & Noble. It’s gotten ahold of SiriusXM, and unlike the rest of the investment community, has plenty of reasons to love what’s going on there (see page 18 of Liberty’s investor presentation[4]). Add in ownership of the Atlanta Braves baseball team and pieces of all the other listed assets, and what you have is a diversified media conglomerate that plays in a totally different space than entertainment companies such as Walt Disney (NYSE:DIS[5]).

The balance sheet holds $2.7 billion in cash against $542 million in debt. The company’s internal assessment of its NAV (page 27 of the presentation) suggests that the company is undervalued by $1.4 billion on an after-tax basis, or $11 per share.

Simply put, I love John Malone and his CEO, Greg Maffei. These guys are consummate dealmakers with an eye for the very long term.

Liberty Interactive (NASDAQ:LINTA[6]) has an extraordinary list[7] of e-commerce (and similar) websites. This includes some of the premium names on the web, such as Bodybuilding.com, Backcountry.com, a 26% interest in Expedia, a 34% interest in HSN, and complete ownership of Provide Commerce (Proflowers.com) and QVC. The company’s combined revenue is outpacing the rest of the industry, with 25% growth versus 12.5% for the industry overall. Liberty Interactive holds a billion in cash, and despite $6.6 billion of debt, it can draw down even more if need be because the cash flow generated by all of these businesses (particularly the home-shopping networks) is exemplary ($718 million projected for 2012), and maturity for most of the debt is 10 years out. Its fab financials even include revenue hits during 2008 and 2009 during the financial crisis, when operating cash flow CAGR dropped to 2.5%. It rebounded to 7.4% in 2010.

Much of the success here is because Liberty chose to buy companies that have extremely loyal and avid fans. Much of the purchasing demographics are right in the 35-to-50 age range — folks with lots of disposable income. Indeed, QVC has an amazing track record: 95% of its customers have purchased five items. Most of these businesses also have low fixed costs and room for expansion as the entire world moves online. The long-term picture for Liberty Interactive is also bright. It’s a buy at $17, for the very long term.